Monday, 11 April 2011

My biggest economic peeve in Malaysia

Ask any Malaysian what's wrong with the economy, and they'll probably say it's the (endemic) corruption. It's a fair enough point. But what really bugs me about this economy is the labour market.

Case in point is the graph above. Output is increasing but returns aren't automatically realised by labour.

Malaysia's inflexible labour market system - i.e. wages are not encouraged to track inflation. The once-a-year wage adjustment process and really stringent hiring and firing rules make it hard for wages to conform to price levels.

It's definitely something that affects private investments - as wages generally dictate talent - and it's something that the Government can do about without using much resources (amend some labour law rules and make the subsidy rationalisation process more transparent <-- but more on that later).


  1. hi... :)

    how do wages affect private investments? if anything, I would think that depressed wages would give firms more scope to invest?

  2. Well, it's a matter of perspective.

    In the short-term, firms do profit from setting depressed wages.

    Over the long-term however, if and when firms do start investing in capital, the required skilled labour will start to cost them. It's going to be quite hard attracting talent when your wages - which, when compared across countries, are affected by subsidies and the exchange rate regime - are depressed.

    ***Exhibit A: Malaysia's 1998-2005 fixed exchange rate regime***

    And yes, i'm predicting the same dilemma for China sooner or later

  3. but if my cost of living is low...what's the problem?

    ...a matter of perspective...?

  4. The grey-ish line in the diagram is actually adjusted for inflation (measure of cost of living), so in effect the quality of consumption has stagnated for that year.

    But anyway, to look at it from a cross-country perspective as well,

    If your cost of living is low compared to your regional neighbours...

    your nominal wage tends to be lower than their's as well because employers are supposed to respond to prices no matter where they are. (i.e. your employer will pay you less, because they know you can survive on less thanks to the subsidies)

    So when you compare savings - after consuming and paying taxes - across countries and you adjust for exchange rates...

    A subsidized economy with an undervalued currency will give less comparative adjusted savings...which I think is an obvious turn-off for talented labour.